Stephen Allen Schwarzman On Blackstone’s Restructuring, The US Economy

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The following is the unofficial transcript of a CNBC interview with Blackstone CEO Stephen Allen Schwarzman on CNBC’s “Squawk Box” (M-F 6AM – 9AM) today, Thursday, April 18th. The following is a link to video of the interview on CNBC.com:

Watch CNBC’s full interview with Blackstone’s Stephen Schwarzman on the firm’s restructuring, the US economy and more

All references must be sourced to CNBC.

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ANDREW ROSS SORKIN: Blackstone out with its first quarter earnings as well as a major announcement, breaking news literally as we speak and we have the man behind it all, Steve Schwarzman, CEO and Chairman of Blackstone right here to tell us all about it. We can walk through the earnings, but to me the bigger issue is the transformation structurally of what you’re announcing this morning in terms of the company moving to be a C-Corp.

STEVE SCHWARZMAN: Well, that’s true, Andrew. So, this is big news for us. And we’ve been a publicly traded partnership since we went public in 2007. And as part of that, you flowed through all your income, but the people who receive it get something called a K1 statement, for taxes, which is very irksome and it disqualifies us as being able to be owned by a huge number of potential buyers. So, for example, right now there are about $12 trillion in mutual funds and index funds.

ANDREW ROSS SORKIN: They can’t own Blackstone at all.

STEVE SCHWARZMAN: They can’t own it. Well, not all of them. We can sell to 4.5 trillion out of 12.

ANDREW ROSS SORKIN: Okay.

STEVE SCHWARZMAN: But if we make this change to be a corporation, which is like every other corporation, then we can double the number of people. We still have a few left who can’t, but I think that will change over time. So, if you look at the ability to have people buy your stock, double the number and we’ll grow to more. And that’s just in the U.S. There are people who are non-U.S., in foreign countries, they can’t buy us either. And so, this kind of change should result in very large increases, I think.

ANDREW ROSS SORKIN: You’ve long talked about how you felt that you were undervalued, especially from a multiple perspective.

STEVE SCHWARZMAN: Right.

ANDREW ROSS SORKIN: How much of that is in the calculus of shifting this structure?

STEVE SCHWARZMAN: I think that’s really an important part. You know, we’ve been included by Morgan Stanley in the top 30 companies in the United States. We score way high compared to almost every other company in terms of growth and earnings. And we have a multiple that’s 30% discount to the S&P.

JOE KERNEN: --up 6.5% already today.

STEVE SCHWARZMAN: It’s really sort of mystical. Makes no sense.

ANDREW ROSS SORKIN: Let’s put some context, though, for viewers who don’t necessarily understand the difference between a partnership and a C-Corp.

STEVE SCHWARZMAN: Right.

ANDREW ROSS SORKIN: And why you originally wanted to be a partnership. There used to be tax advantages to be a partnership.

STEVE SCHWARZMAN: Right.

ANDREW ROSS SORKIN: And some of those advantages, I don’t want to say they’ve gone away, but the mix has shifted in large part because of the new tax regime in the past year. KKR, by the way, made the same shift earlier this year. And you’ve been telegraphing this, or at least talking about it so I think a lot of investors who have been paying attention understood this was on your mind.

STEVE SCHWARZMAN: Well I think they were waiting to see what we would do. And in -- when we went public, we just flowed all our income through. And now we’re changing the mix of our income. We already pay a lot of income taxes at the firm on all of our current income, and our current income is going up.

ANDREW ROSS SORKIN: So—but, speak to the true tax costs in terms of how you’re projecting what it’s going to cost you, how your tax bill-- what your tax bill is now and what it becomes as a C-Corp.

STEVE SCHWARZMAN: Our tax bill will go up somewhere in the 3, 4, 5% over the next five years and then higher after that. And the reason we’re doing, accepting that, is we think that the value for our shareholders of our stock appreciating should be much higher than that loss of current income.

STEVE SCHWARZMAN: Well, our business is pretty amazing. And we just raised $126 billion this year. And that’s a huge number in the alternative area. We’re the largest by far of everybody in that business and we’re deploying capital as well. And so, you know, the environment is working surprisingly well for people like us. Prices are a little high, but we basically have a chance to fish for deals all over the whole world.

ANDREW ROSS SORKIN: You have expanded into all sorts of new business lines, and as you said, you’ve been raising money like crazy. Literally, I think the money under management – AU under management has almost doubled – has it almost doubled in the past two, three years now?

STEVE SCHWARZMAN: Yeah. And we’ve increased six times since we’ve gone public.

ANDREW ROSS SORKIN: So, my question to you, I feel like I’ve known you for a long time, and I feel like back in the day when you were much smaller you might have said size can be the enemy of performance. How do you feel about that today?

STEVE SCHWARZMAN: Well, you know, the reason we still perform exceptionally well is that we’re not putting all the money in one strategy. That’s how you get hurt. We keep inventing new ways to invest, new things to invest in, new places to invest and as you do that, you can keep every one of your strategies at exactly the right size. So, our private equity business, our fund will have the largest fund in the world. And that enables us to do deals that most other firms could never think about.

ANDREW ROSS SORKIN: Is there an upper limit, though, for a particular business line? Meaning, do you say to yourself, ‘Okay, in the private equity space, once we get to this number, we just can’t do it.’

STEVE SCHWARZMAN: Yeah, what happens—

ANDREW ROSS SORKIN: I mean, a lot of people look at Masa Son, for example, right now with this $100 billion fund, and they say, ‘That’s going to be tough to make it really work.’

STEVE SCHWARZMAN: Well, I think that’s true, Andrew. There’s a right sizing for the amount of money that you can handle. You have to remember, the size of some of the funds has grown, but the reason for that is that markets since the global financial crisis have gone up, what, 3, 4 times. And so, the size of everything is bigger. The size of companies that you can buy is bigger.

JOE KERNEN: So, you get initial pop of about 4%. It just keeps going. It looks like it’s headed up to 8%.

ANDREW ROSS SORKIN: Now up to 8%. As we’re speaking.

JOE KERNEN: So, you probably – you’re a confidant to some extent to the President. You probably were a proponent of the tax reform and the deregulation. Do you attribute some of the positive momentum in the economy to those moves? And some of the companies that you own, can you point to concrete examples where either lower taxes or less regulation has improved business for your -- the things that you own?

STEVE SCHWARZMAN: Well, it’s pretty clear this was a simulative –

JOE KERNEN: Was it a front-end loaded stimulus? A sugar high, Steve?

STEVE SCHWARZMAN: It was somewhat front-end loaded on capital expenditures. But, I think a lot of it isn’t just the tax aspects, which were done in the corporate area because we were really quite uncompetitive globally. But the decreases in regulation is really what has –

JOE KERNEN: And you can point concretely to some of your businesses where it’s just obvious that that helped.

STEVE SCHWARZMAN: We’re seeing it vis-a-vis the firm itself. You see it everywhere. And that doesn’t mean there’s some kind of unilateral disarmament going and we’re doing irresponsible things in the United States.

JOE KERNEN: Do you think that--

MELISSA LEE: Has it opened you up to new investments that you might not otherwise have looked at but for the regulation changes?

STEVE SCHWARZMAN: But we’re seeing that the cost of expanding into areas is lower. And there is a positive sense in almost everything you do that you’re not going to be inhibited for reasons that make no sense. You know, part of the things, I’m on the hospital board, you know, over the last ten years some of the costs of compliance of the same hospital doing the same thing without any problems have gone up hundreds of millions of dollars. To the extent that you reverse that, you’re not impacting medical care but there’s more money for nurses.

MELISSA LEE: But look at what’s going with health care though today, in terms of publicly traded companies. The worst performing sector of this year and it’s really being dogged by political concerns about Medicare for all, et cetera. Since you sit on the board of a hospital, is that going to be a cloud over how you serve customers?

STEVE SCHWARZMAN: That whole sector is probably the hardest set of problems we’re facing in the country.

JOE KERNEN: Steve, you’re seeing some organic revenue growth at this point. Income inequality, are you optimistic that the current environment that we’re in will start to relieve some of the social ills that are now becoming so large that some people think we need to do something or there is going to be some type of revolution? My point is that the wage gap in China is starting to narrow where we can start – it makes sense to have companies here again. So, some of what we’ve been subjected to for the past 30 years, maybe some of those pressures are starting to lessen and maybe we don’t need to start questioning capitalism and start talking about reforming capitalism and conscientious. I don’t even -- Larry Fink said conscientious -- I thought that was like an objector, but he used it as a conscientious capitalism, or something. I mean, you’ve seen the debate. I mean, where are you on this?

STEVE SCHWARZMAN: Well, I think the numbers tell the tale. That you know like half of our population in the United States in terms of the work force is living paycheck to paycheck. They basically don’t have savings. And they don’t believe, because it’s probably true, they don’t have the same opportunities that people of my generation had. And unless we solve this problem, this is not optional to solve.

JOE KERNEN: Right. What are the answers, though?

STEVE SCHWARZMAN: It must be addressed.

JOE KERNEN: But it’s under the -- there’s capitalism and then we work tax policy and education and everything under the capitalist umbrella. We don’t suddenly start thinking that we have the wrong economic system, do we?

STEVE SCHWARZMAN: I think this is a governance problem in the United States.

JOE KERNEN: Right.

STEVE SCHWARZMAN: What we have is less an issue of income inequality than income insufficiency for the bottom 50% of the society.

JOE KERNEN: But is redistribution the answer or is organic growth?

STEVE SCHWARZMAN: There are always answers. What we need is basically a Marshall plan basically for the middle class. And you know, you have to address this in three different areas. One, you have to get more cash to these people. They simply aren’t earning enough. And you can do that through minimum wage changes. That only affects, interestingly, about 15% of the population.

ANDREW ROSS SORKIN: When you say you can do that through minimum wage changes, is that through policy in terms of what you think minimum wage should be, as you’ve seen a number of big companies including Amazon have raised their own minimum wages? Are you looking at Blackstone portfolio companies and saying, ‘You know what? We are going to raise the minimum wage on our own’?

STEVE SCHWARZMAN: Andrew, I look at this as a systemic problem. This is not anecdotal. This is like half of our society is severely disadvantaged. We can’t allow that to continue. So that means you need policy solutions.

STEVE SCHWARZMAN: So, you would advocate for higher minimum wage?

STEVE SCHWARZMAN: I would. And I think what happens with that you not only address that group, there is a flex on top of it where you have to increase other people. I think we should do that.

MELISSA LEE: How—

STEVE SCHWARZMAN: I think secondly, Melissa, we’ve now slipped from number one in primary, secondary education when I was young, back in, you know, the medieval times, and we’re now down depending upon who is measuring it to number 30 or 35 in the world. Our graduates simply aren’t competitive on a global basis. You can’t be in a knowledge economy, you can’t do all the tasks you need to do if you’re number 30 or 35. And so, that needs to be –

JOE KERNEN: We have to figure that out, whether it’s breaking the teacher’s unions.

ANDREW ROSS SORKIN: Do you have a third item?

STEVE SCHWARZMAN: Yes.

ANDREW ROSS SORKIN: What’s the third one?

JOE KERNEN: We have got to figure out how to fix education. I want to hear that.

STEVE SCHWARZMAN: You have to have some type of technical training for people who don’t go to college. And they have great models in Germany. There are all kinds of things. One thing you can do is each state could get, you know, some allocation from federal budget and the business communities in those states have to have links with the high schools and start training the people –

JOE KERNEN: Well, what about public schools, Steve? How do we fix the public schools? With charter schools? With choice? You just tax people more and throw it at federally public school –

STEVE SCHWARZMAN: Joe, everybody has different ideas. One thing I think that we should do is we should make teachers pay no tax. I think teachers is where the key is and we have to address getting the best people -- and it’s not just money. And you can see from these strikes, people don’t have enough money. But we also have to make teachers a special class in our society. If we really want to change, we have to advantage them.

ANDREW ROSS SORKIN: I have to say, these are very bold, bold thoughts from Steve Schwarzman this morning.

MELISSA LEE: It is very interesting.

ANDREW ROSS SORKIN: Before we let you go, I have two just broad questions. One is just about the market itself, which is where are we? Where are we? Are you optimistic? Are you positive going through the rest of this year?

STEVE SCHWARZMAN: I would say we have had a good run. There’s no doubt. Now, what happens –

ANDREW ROSS SORKIN: What am I supposed to take away from that?

MELISSA LEE: That’s past tense. That’s past tense.

STEVE SCHWARZMAN: What happened? We basically had a fourth quarter where, I hate to say it, you know, the media was declaring we were going into a recession. We never thought so. And I think I said it publicly.

ANDREW ROSS SORKIN: Yep, I remember.

STEVE SCHWARZMAN: And we didn’t. So, what happened is we overshot on the way down significantly and when the recession didn’t happen, when China didn’t fall off a cliff the way people were also saying, now it’s popped up. And it’s at a pretty good level. The idea that we’re going to sort of keep increasing at the same rate doesn’t make a lot of sense to me. You know, he economy is good, but it’s you know, maybe 2.5, down from where it was in the 3s.

MELISSA LEE: You believe it was the turn in China, it sounds like. You believe in the uptick in data.

STEVE SCHWARZMAN: Well China has done -- I was in china a few weeks ago and met with the head of the central bank and he said, ‘Look, we’ve done a lot of interesting things to stimulate the economy.’ And he said, ‘We’ve basically turned.’ So, we’re not concerned about that.

ANDREW ROSS SORKIN: So, what do you, I mean, you guys do have interests obviously in public markets.

STEVE SCHWARZMAN: We do.

ANDREW ROSS SORKIN: And your thought is that right now we’re already where -- we’re as high as we’re going.

STEVE SCHWARZMAN: I think we’ve had a good year.

ANDREW ROSS SORKIN: A good year. It’s the spring.

STEVE SCHWARZMAN: We’re up 16, 17%.

ANDREW ROSS SORKIN: right.

STEVE SCHWARZMAN: The Nasdaq is up, what, 20. This is not sort of nothing.

MELISSA LEE: It sounds like you’re telling people to take the money and--

STEVE SCHWARZMAN: But I am saying the rate of increase I think has to slow down.

JOE KERNEN: Steve in his point of life might be more interested in preservation of capital than growing capital, I would say. Is there some truth to that with you know, 10, 12 billion? We still need to make our 10, 12 billion, so--

STEVE SCHWARZMAN: Well –

JOE KERNEN: I would be in T-bills if I were you. Or muni-bonds. But that’s just me.

STEVE SCHWARZMAN: Well, you know, I do a lot of my investing -- we have restrictions on what we can do because we know so much. So, I keep a lot of money in index funds and you know, that’s been like a very good thing over time. And I’m not selling my index funds.

JOE KERNEN: There’s another company that starts with Black.

STEVE SCHWARZMAN: That much I would say.

JOE KERNEN: You can put some money in that other company that starts with Black because their guy thinks it’s going to be a melt-up.

STEVE SCHWARZMAN: Well, I watched Larry yesterday. That was a great interview you all did. And you know, Larry is always very opinionated and he is always very positive--

STEVE SCHWARZMAN: --on markets. And you know, he always has something, you know, to say on things. But that was good.

JOE KERNEN: Guess what, there’s been a Barr sighting. Apparently just moments ago. There was actually a camera ready when he left his home ahead of this morning’s news.

MELISSA LEE: You can see him through the trees.

JOE KERNEN: The conference is scheduled – the news conference is scheduled at 9:30 a.m. There it is. We briefly left Lori Loughlin’s house and went over to the Barr’s house and we’re stationed outside there now. We’re going to have live coverage and market reaction to that--

ANDREW ROSS SORKIN: Steve Schwarzman--

JOE KERNEN: --conference and more all day right here on CNBC.

ANDREW ROSS SORKIN: Okay. Steve Schwarzman, thank you for being here. Thank you for bringing us the big news. And we’ll watch, as we’ve said, the stock moving materially this morning on this news. So good luck.

Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. -
Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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